Why India could be the winner of a US-China trade war

If the US and China don’t get along, the US will turn increasingly to India as a large Asian actor.

By Iain Marlow

The prospect of a trade war between China and the U.S. elicits frequent warnings of the risk to the global economy. India sees it somewhat differently.

Senior officials in Prime Minister Narendra Modi’s party say India stands to benefit from the tensions. President Xi Jinping will need India’s huge market as President Donald Trump threatens punitive measures against Chinese manufacturers and U.S. firms that produce goods offshore, according to Seshadri Chari, a national executive member of the Bharatiya Janata Party.

The requirement for Beijing to maintain economic growth and domestic political stability also gives New Delhi geopolitical leverage as it seeks to counteract China’s inroads in South Asia, including in Pakistan, he said.

"China’s production strength requires a market, and the U.S. is no longer a Chinese market," Chari said in an interview. "China at this stage cannot risk a meltdown in its economy. It’s too politically risky for Xi Jinping. They need a big market. And in Asia, we are the largest market."

China and the U.S. have both indicated they are keen to avoid a full-blown trade war, and Trump is yet to follow through on campaign pledges to take action against Beijing. But with Trump meeting Xi on Friday after a renewed bout of Twitter criticism and a pledge to review U.S. trade deficits, the future of the trade relationship is unclear.

In South Asia, potential changes to U.S. policy toward the region could prove a boon for New Delhi, particularly if Washington decides to erect protectionist measures against Chinese manufacturers -- or cuts military aid to India’s rival Pakistan.

‘A Position Of Strength’ Yashwant Sinha, a senior BJP member who served as both foreign and finance minister in previous governments, said if the U.S.-China relationship "were to implode," India would not be the only country trying to profit. Still, India’s vast domestic market means it has an advantage with both countries, he said.

"The consuming class in India is far, far bigger than the population of many countries, so we represent a huge market, we don’t have to go around advertising it," Sinha said. "That is our big leverage. That gives us the heft to demand concessions in return for Indian goods and services” and the movement of personnel.

The statements from Sinha and Chari offer a glimpse into the BJP’s foreign policy calculus at a time of global uncertainty. They also reveal the confidence India brings into trade negotiations, where it has often held back from signing or moving ahead on deals granting greater access to its more than 1.2 billion people.

Still, there are potential risks to India if China and the U.S. engaged in a fully-fledged dispute. And more broadly, India has found itself in the cross-hairs of Trump’s efforts to clamp down on visas often used by Indian technology workers in the U.S.

Collateral Risk "A protectionist America hurts China more than it hurts India, though India is not without concerns," said Ashok Malik, a distinguished fellow at the Delhi-based Observer Research Foundation.

China could respond to trade frictions by starting a destabilizing currency war. And while India is a potential market for Chinese infrastructure funds, it is "not a market for the whole range of consumer goods that the U.S. is,” he said.

"While there are political benefits to a deteriorating relationship between the U.S. and China, the economic impact of that is likely to be much more mixed, and could have collateral impact on India and on several other countries."

Pakistan Question The U.S.-China tensions come as Modi’s rhetoric becomes more explicit about Beijing’s $55 billion investment in the China Pakistan Economic Corridor. China is funding infrastructure in the Pakistan-administered part of Kashmir, which India claims as its territory.

"Today, India is dealing with China from a position of strength," he added. "China is losing the American market very fast."

The view that India could benefit from a deteriorating relationship between the world’s two largest economies crosses party lines.

Shashi Tharoor, a lawmaker with the opposition Congress party and chair of India’s parliamentary standing committee of foreign affairs, suggested China-U.S. tensions could push both countries toward India.

"If the U.S. and China don’t get along, the U.S. will turn increasingly to India as a large Asian actor," said Tharoor, who was a junior foreign minister in the previous Congress government. "And China, if its U.S. market contracts, will need to diversify its markets and investment outlets, including towards India."

Still, it would be "premature" to assume U.S.-China ties will nosedive given the scale of their interdependence, said Ashok Kantha, a former ambassador to China and director of the Institute of Chinese Studies in New Delhi.

"India is becoming a more important market for China," he said. But given India’s $52 billion trade deficit with China, "our appetite for absorbing redirected exports from China is limited."